Time for Urgent Action to Tackle Tax Avoidance

When times are tough for families and businesses, and the government is cutting spending and raising taxes, the public are rightly demanding to know whether everybody is contributing their fair share.

The chancellor's decision to cut the top rate of tax in the Budget while millions of families and pensioners on middle and low incomes see their taxes go up has already exposed the 'we are all in this together' slogan to ridicule.

And in recent weeks high profile cases of major companies accused of avoiding their taxes have aroused real anger. But it's not good enough for the government to simply wring their hands - and nor will simply naming and shaming do the trick. We urgently need to look at how the wider corporate tax system needs to change to reflect the changing nature of the UK and global economy.

Individuals, small businesses and society want leadership on this issue - they want to know that in tough times the burden is being fairly shared.

In a fast moving world it remains a constant struggle to maintain a competitive, sustainable tax base whilst incentivising and rewarding long term business investment. But inaction now risks undermining the work of HMRC and our legislation in the UK risks falling behind.

Major multi-national corporations make a significant contribution to the UK economy and to the Exchequer directly through the taxes, National Insurance and business rates they pay, and indirectly through the jobs and sales they create.

But when a company can make sales of £1.2billion, describe itself to investors as profitable, and yet report no profit here in the UK, the public is entitled to ask whether something is going wrong. Indeed some of the most vocal people in recent weeks have been other businesses who feel there is not a level playing field.

In the modern world, unless there are effective rules, it can be very easy, under the current system of company taxation, for a multi-national business to move profits from one country to the next. And, if there aren't those tight rules, opportunities are created for a minority of firms to plan their way out of paying tax.

The complex structures that such companies put in place include creating a subsidiary in a low tax jurisdiction to take ownership of, for example, the valuable brand name that the company operates under - and that tax haven subsidiary then charges the other group companies a fee or royalty for using that brand. As a result it diverts what would have been high-taxed income to a low-taxed company, potentially undermining the other country's tax system.

The current system of international taxation is open to abuse and, in spite of changes that are designed to reduce the scope for this type of avoidance, in some cases the system clearly continues to be abused. That is why the Organisation for Economic Co-operation and Development (OECD) has developed rules for where this is being done legitimately and where it isn't - which all member countries agree to follow and enforce.

In government Labour did make progress, working with international organisations on tightening those rules up and making them easier to enforce. A Labour minister chaired the EU Code of conduct group that tackled harmful tax incentives that artificially distorted company investment decisions. And in 2002 the Labour government launched the Extractives Industries Transparency Initiative (EITI) whereby many countries in the developing world forced mining and extraction companies to publish what they paid in tax by country.

But government urgently needs to adapt to the changing global economy. Things will only get more challenging as companies become ever more global, as online sales become an ever greater part of our retail economy, as technology changes the way companies operate and with highly mobile intellectual property becoming such a large factor in companies' profits.

Ensuring that the way in which business is taxed keeps pace with the way in which business is able to organise is a fundamental requirement for a modern government; and ensuring that the way in which business is taxed can be seen to be fair is a fundamental requirement in a modern democracy.

Stopping these structures being used to abuse the tax system unilaterally here in the UK is difficult. But there are things the government could and should be doing right now.

We need action in five areas:

1. Integrity of the system. We urgently need to look a how UK tax laws can be made stronger so as to properly deter tax avoidance. For example, in contrast to other OECD countries, the UK does not have specific statutory rules governing what internal documentation should be kept in relation to transfer pricing documentation - only guidance. Why should a company be able to shift profits abroad without being legally required to be able to prove it was done legitimately?

2. Tax administration and enforcement. We need to improve the capacity of HMRC and ask whether it has the resources, expertise and the right specialists in different sectors to adequately police this increasingly complex area. Deep cuts to the HMRC budget of 16.5 per cent, with an extra 10,000 staff being lost by 2015, risk being a false economy if they seriously undermine our ability to enforce the law and tackle tax avoidance.

3. Transparency. Improvements in transparency and reporting could help restore public trust and improve enforcement. Many of the recent examples that have come to light have done so without the companies themselves publishing the information, adding to the sense that there is something to hide. But equally there are many businesses who do pay a great deal of corporation tax, as well as lots of other taxes, and should be recognised for that.

4. Tax havens. We need to revive stalled efforts on an EU and international level to tackle the problems that are caused by the use of tax havens. As Ed Miliband said at the start of 2012, we need to act now and the government should not be waiting until some time next year for progress, as their current plans imply. And our own crown dependencies and overseas territories need to be more transparent - to lead the way to a proper EU regime.

5. International reform. The rules of the game are set globally and so radical reform cannot be achieved here in Britain alone. That is why we need action by members of the EU, OECD and the G20 to deliver to deliver a better, fairer and more robust system that would ensure a sustainable flow of revenues and be less susceptible to manipulation. UK Ministers should be putting tackling tax avoidance at the top of the agenda at these international meetings.

This is a complex and fast-changing area, but urgent action is needed to ensure that, while we maintain vital business investment in our economy, our tax system is fit for purpose. And as families and businesses face the consequences of further tax rises and spending cuts, ensuring that everyone pays and is seen to pay their fair share will be more important than ever.